What makes a business successful?

The keys to success for any organization are directly related to what an organization is, and how it operates in the world. Once you understand what an organization needs to survive, you can better understand how to succeed.



Here are a few factors that may be applied to your business.



1. Managing and developing people 
 People today want some direction and structure, but they also want freedom and encouragement to develop their skills and knowledge. Effectively managing people requires balancing constraining forces (providing direction, structure, organization, some rules) with liberating forces (encourage personal growth, development and creativity).

2. Strategic focus 
 In today’s rapidly changing world, it’s not just enough to have a purpose for existing. Leaders have to focus the organization’s resources on the greatest opportunities, which can shift with each new day. If you review what has happened in the world or your organization in the past year or two, and you’ll understand what we mean by the reality of constant change. Opportunities come and go. Major customers or income sources can change or even go out of business at any time. So it’s necessary for leaders to keep focused on the desired goal of increasing sales and profits, or more satisfied customers, while constantly steering the organization across the stormy waters of the marketplace. The job of focused leaders is to optimize business in a changing environment.

3. Operations, or what people do all day
 What the people in your organization do day in and day out to create value for customers, to earn or justify income, strongly determines whether you succeed or fail. You can’t separate operations from strategic focus which gives direction, people who do the work, customers who pay the money and physical resources needed to do the work.



4. Resources 
Finances, facilities and equipment are the big 3 physical resources. If you don’t have enough money, you can’t start or sustain an organization. And one of the biggest expenses is providing adequate facilities and equipment for people to work in and with. Experienced managers learn that cash flow is king. It doesn’t matter how much customers owe you, it’s when their money enters your bank account so you can use it to sustain the organization. Failing to manage cash flow is the No. 1 reason for business failure.

5. Customer relations
Customers are where the money comes from, so in many ways this is the most important success factor. As the famous business guru Peter Drucker said years ago, the purpose of a business is to get and keep customers. Getting customers involves marketing – indeed this success factor includes all kinds of marketing and sales. The key to successful customer relations is to give them what they need, not just what you want to sell. Effective sales and marketing begins with asking existing and potential customers what they need, what problem they want solved or deficiency filled. By keeping in touch with customers and asking these questions often, you’ll do a better job of developing customer loyalty and keeping competitors away.

I hope these ideas help understand the keys to success in your organization.  Please let me know your thoughts.
gerry@polarisgroupmc.com

Thinking About Staffing Additions?

The following outline identifies issues small businesses may deal with on staffing:







1. Should the business hire permanent staff or contract help?
Staffs usually provide more continuity and stability but add to cost due to employment taxes and perhaps benefit programs.
Staffs provide the advantage of employee loyalty and an edge in a more positive morale and productivity.
Contract people can be terminated at any time negating the costs of severance programs.
Contracting can add flexibility by allowing the adding or deleting of staff as demand requires.
Compatibility is sometimes harder to than competence so staff can be more productive within a group or department.
Hire a contract person as a temp. If the person works out you can make the job permanent.

2. Should business promote from within or add new employees.

Promoting from within does enhance employee morale and loyalty to the company. Employees who see the company as interested in career development and loyal to staff tend to make a greater effort in supporting company goals and success.
Introducing new employees from the outside does provide a fresh approach to some positions and can re-energize the company. Also, securing new outside talent may reduce the cost of training and development of current staff.

3. Full time vs part time staffing

Businesses should be careful not to add staff too soon. Temp or part time staff can be used as the business grows and changes to permanent positions can be made as the business matures.
If the business has seasonal peaks and valleys, use of part time staff provides the flexibility to adjust to demand.
In some situations, job sharing can provide the opportunity to maintain a larger pool of employees who are familiar with the work but prefer to work part-time.
Let growth, profitability, and demand dictate when to expand permanent staff.

I hope these ideas provide a little insight into options for staffing as the organization grows.

Keeping Key Managers

Keep Key Management Personnel

There is a key role for incentives in managing and retaining key executives for the company. Here are some reasons for and examples of how to structure effective incentive programs for management.


 Reduce Turnover
You want to retain key management personnel for a number of reasons. High turnover destabilizes the company and can have severe effects on moral of employees and the bottom line. You want to retain high performing managers to enhance your own company’s growth potential and to keep key people from wanting to look at other opportunities

 Set Goals
Good managers don’t expect a bonus without achievement but don’t set the bar so high as to be unachievable. That becomes a disincentive to achieve.
Set goals that help improve your bottom line; just achieving new sales records is not a priority if the costs exceed the benefit. Sales executives should be just as concerned about profitable sales as the CFO.

 Share Profits
Pay executives for overachieving by sharing profits. As profits goals are exceeded rewards can continue to be major incentives if shared fairly. Reward contribution.
You don’t have to give everything away in this process. Be competitive but unique and allow key employees to participate in goal setting. When they are part of setting the goals they are more likely to increase efforts to reach the bar.


 Be Transparent
Be completely transparent. If goals are profit based show actual revenue/profit results so that there is a clear understanding of achievements. Conduct periodic reviews to ensure all incentive participants know where they stand. Let’s not have surprise results announced at year end….good or bad.

Incentives are important tool to maintain a motivated and dedicated management team and a well-designed plan can bear fruit over the long term.

Do your business ethics measure up?

Have you ever wondered how many of the successful businesses get caught in the public spotlight and are criticised for the lack of integrity in the organization.






Culture counts and it starts at the top with senior management or the board of directors. Organizations need to understand that ethics drive compliance and the leadership is responsible for setting the tone.

Checks and balances require care in how the organization structure is designed, how human resource decisions are made, and how overall business is conducted. Organization integrity is paramount; when difficult decisions are faced the instinct must be to default to core values.

Larger organizations often pressure smaller business for concessions they can ill afford but if they don’t concede an entire contract may be lost. This happens even if the original pricing were agreed between the parties. Where is the pride in living up to one’s word? What values are at the core of that behaviour?

Ethics are derived from values and they make integrity a way of life in the organization. Honesty, respect, and responsibility can be pillars on which to build. It is essential that these values are shared throughout the organization through practice in decision making.

The vast majority of businesses are ethical and at least have informal standards expressed through the behaviour of the CEO and senior managers. Anyone working in an organization that seems to behave in an overtly unethical way and chooses to stay or ignore the behaviour is part of the problem.

Corporate governance is used to promote business ethics and social responsibility. It also creates the framework for guidelines used by all individuals who are part of the organization.

Need to manage your Money Better?

Cash flow is the fuel your business needs to keep running smoothly. Here are a few techniques you may want to consider to improve your operation.

1. Budget cash flow.
Create a cash flow budget to make sure you can pay expenses; it allows you to be proactive in monitoring revenues and expenses. Include sales/revenue forecasts, receivables, and outflows including costs of goods, debt payments and operating expenses.

2. Understand sensitivities.
It is important to know which items impact cash flow most among price, volume, costs or overheads. Cost of goods is a key component but may be difficult to change. At the same time competitive pressures may prevent a price increase.

3. Credit.
Effective credit policies are a key component to successful cash flow management. Early payment can be encouraged through discounts on early payment or penalties for late payment. Careful monitoring of late payments is important so they do not become write-offs or tie up working capital.

4. Payables.
Review payables regularly to maintain obligations. An aging schedule will show you how much you owe and whether anything is past due.

5. Reduce costs
Review operations for ways to reduce expenses. When business volume accelerates consider hiring contract or part-time staff before committing to full time employees.

Good luck with your review and improving your cash management. Your banker will appreciate your efforts and this can have a positive impact on the banks impression of your business and the professional management approach.

Crisis Management

Unplanned events can have a devastating effect on small businesses. Crises such as fire, damage to stock, illness of key staff or IT system failure could all make it difficult or even impossible to carry out your normal day-to-day activities.
At worst, this could see you losing important customers - and even going out of business altogether.

But with good planning you can take steps to minimize the potential impact of a disaster - and ideally prevent it happening in the first place. Here are a few ideas to consider:

1. Plan
It's essential to plan thoroughly to protect yourself from the impact of potential crises since you may lack the resources to cope easily in a crisis.
Failure to plan could be disastrous. At best you risk losing customers while you're getting your business back on its feet. At worst your business may never recover.
As part of the planning process you should:
             -    identify potential crises that might affect you
             -    determine how you intend to minimize the risks of these disasters occurring
             -    set out how you'll react if a disaster occurs in a business continuity plan
             -    test the plan regularly

2. Assess the impact
You need to analyse the probability and consequences of crises that could affect your business. This involves:
- assessing the likelihood of a particular crisis occurring - and its possible frequency
- determining its possible impact on your operations

This kind of analysis should help you to identify which business functions are essential to day-to-day business operations. You're likely to conclude that certain roles within the business - while necessary in normal circumstances - aren't absolutely critical in a disaster scenario.

3. Minimize the Potential Damage
Once you've identified the key risks your business faces take steps to protect your business functions against them.
Premises:
Good electrical and gas safety could help protect premises against fire. Installing fire and burglar alarms also makes sense.
Think what you would do in an emergency if your premises couldn't be used. You might consider an arrangement with another local business to share premises temporarily if a crisis affected either of you.
Equipment/machinery:
If you use vital pieces of equipment, you may want to cover them with maintenance plans guaranteeing a fast emergency call-out.
IT and communications
Installing anti-virus software, backing up data and ensuring the right maintenance agreements are in place can all help protect your IT systems. You might also consider backing up your data offsite on a secure server.
Printing out copies of your customer database can be a good way of ensuring you can still contact customers if your IT system fails.
People:
Try to ensure you're not dependent on a few staff for key skills by getting them to train other people.
Consider whether you could get temporary cover from a recruitment agency if illness left you without several key members of staff. And take health and safety seriously to reduce the risk of staff injuries.
Insurance:
Insurance forms a central part of an effective risk-management strategy.

4. Continuity
You should draw up a business continuity plan setting out how you will cope if a crisis does occur.
             It should detail:
- the key business functions you need to get operating as quickly as possible and the resources you'll need to do so
- the roles of individuals in the emergency
Making the most of the first hour after an emergency occurs is essential in minimizing the impact. As a result, your plan needs to explain the immediate actions to be taken.

These are some steps that can be taken to ensure that damage from any crisis is minimized. Proper planning can be critical to survival.

This week’s blog is written by Federica Nazzani, President, Capital Assist (Valuation) Inc. The blog provides a continuation to last week’s article providing some of the optional methods for valuing your business.

This is the second part of a two part article on the topic.


Making Sense of Valuation
By Federica Nazzani

Approaches to value
There are three general approaches to valuing a business and/or asset, namely the cost, earnings, and market approach.  The approach adopted will be determined having regard to factors specific to the company including profitability and the risks related to the operations of the company as well as industry and economic conditions.
  
Cost approach
The cost approach is (i) the sum of the costs required to replicate the asset or (ii) the book value of the assets and liabilities of the business.  The cost approach may be appropriate where the value of the business interest does not include intangible value and the earnings potential of the asset does not exceed its cost.  This approach does not consider competitive strengths and weaknesses, potential for earnings growth or risk associated with achieving the earnings of the business and therefore, requires significantly less judgment than alternative approaches.  This approach most often results in relatively lower valuation.

Earnings approach
The basis of the earnings and/or cash flow approach is the future economic benefits derived from the business and/or commercial exploitation of the asset, taking into account the risks associated with achieving those benefits.  Most important to a purchaser of a business and/or asset is the ability to generate future earnings and cash flows and satisfy an investor’s expected return on investment.  It is determined by applying an appropriate capitalization/discount rate to a selected stream of historic and/or prospective earnings or cash flows.  The more aggressive the cash flows or earnings assumptions, the higher the capitalization/discount rate for achieving those projections.
A variation of the earnings approach, most often adopted in corporate finance, is the discounted cash flow technique (“DCF”).  DCF is calculated as the present value of future cash flow expectations.  It is applied in various situations where a business is in start-up or growth phase or forecast to experience a change in operations (i.e. merger, divestiture, etc.), or in instances where the business has a finite life.  The preparation of a detailed financial forecast will require a detailed review of the historic performance, internal operations and relationships between revenues and costs, and an analysis of the external competitive environment (i.e. trends of competitors and industry as a whole).

Market approach
Value determined based on the market approach is often based on the use and analysis of comparable transactions in the marketplace.  These transactions are a good indication of the prices paid in the marketplace for similar assets and/or business interests.  However, certain transactions do not provide a direct means of determining value as it is often difficult to find comparable assets and/or business interests and public disclosure of transaction information is frequently not available.

Understand the basics 
The valuation exercise is best described as “an art, not a science”.  This is correlated to the level of judgment that is required in supporting value.  Arriving at a valuation or the worth of a business and/or asset will require an understanding of the basics including a defined and supportable business model, thorough assessment of the future operations and relative risks, and a clear understanding of the competition and industry trends.

Please contact Federica for more information on this important topic. She can be reached as follows:

Federica Nazzani
President
Capital Assist (Valuation) Inc.
Tel: 226.347.8100
Email: fnazzani@capitalassist.ca